INDIA
FINANCE REPORT - REPORTS & INDICES
News: India Finance Report: A warning
against repeating past mistakes
What's
in the news?
●
The first edition of the India Finance
Report published by the Centre for Advanced Financial Research and Learning
(CAFRAL), an independent body set up by the Reserve Bank of India.
●
It has taken stock of India’s non-bank financial companies sector — commonly called the shadow banking sector — and pointed out
both the ongoing improvements and emerging risks.
India
Finance Report 2023:
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The India Finance Report 2023 (IFR 2023)
is the first flagship publication of the Centre
for Advanced Financial Research and Learning (CAFRAL).
●
CAFRAL is a not-for-profit organisation set up in 2011 as an independent body
by the Reserve Bank of India (RBI) to promote research and learning in banking
and finance.
●
The IFR 2023, with “Connecting the Last
Mile” as its theme, provides an in-depth assessment of non banking financial
companies (NBFCs) in India.
NBFCs
and their Regulations:
●
Non-Banking Financial Companies (NBFCs) in
India are companies registered under the Companies
Act of 1956 that provide banking services without holding a bank license.
●
They offer a variety of services such as loans and advances, saving and investment
plans, credit facilities, insurance, acquisition of shares, and more.
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The working and operations of NBFCs are
regulated by the Reserve Bank of India (RBI) within the framework of the
Reserve Bank of India Act, 1934 (Chapter III-B) and the directions issued by
it.
Key
Findings of Report:
1.
NBFC credit growth:
●
The NBFC sector witnessed a recovery in
credit growth in FY23, reaching 13.5 percent, after a slowdown in FY22 due to
the COVID-19 pandemic and the liquidity crisis.
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The growth was driven by segments such as
retail loans, gold loans, microfinance and infrastructure finance.
2.
NBFC profitability and asset quality:
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The NBFC sector improved its profitability
and asset quality in FY23, aided by lower cost of funds, higher fee income,
better collection efficiency and regulatory forbearance.
●
The sector’s return on assets (RoA)
increased to 2.1 percent and gross non-performing assets (GNPA) ratio declined
to 5.8 percent in FY23.
3.
NBFC digital transformation:
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The NBFC sector embraced digital
transformation in FY23, leveraging technologies such as artificial
intelligence, machine learning, blockchain and cloud computing to enhance
customer experience, operational efficiency, risk management and innovation.
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The sector also collaborated with FinTechs
and platforms to expand its reach and offerings.
4.
NBFC regulatory and policy developments:
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Risks such as the introduction of a
risk-based supervision framework, the revision of the NBFC classification and
registration criteria, the implementation of the colending model with banks and
the announcement of the NBFC resolution framework.
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These developments aimed to strengthen the
oversight, governance, resilience and stability of the sector.
RISKS
IDENTIFIED IN THE REPORT:
1.
Systemic risks from rising bank financing for NBFCs:
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The report warns of systemic risks from
the increasing inter-linkages between NBFCs and the banking sector.
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Banks mostly lend to bigger NBFCs, leading
to increased cross-lending within the sector.
2.
Risk of repeating past mistakes:
●
The report cautions against repeating past
mistakes that led to monetary shocks and caught businesses off-guard.
3.
Concerns over delinquencies:
●
There are concerns over delinquencies in
the NBFC sector. However, public sector banks have assured the government that
small loans do not pose a systemic risk.
4.
Impact of the COVID-19 pandemic:
●
The pandemic has had a significant impact
on the NBFC sector, leading to challenges in extending credit.